FHFA to relax standards

How do you get lenders to loan more money? This is the question the architects of our shaky housing recovery have asked time and again.

The latest answer by the new Director of the Federal Housing Finance Agency (FHFA), which oversees the government-sponsored entities (GSEs) Fannie Mae and Freddie Mac, is to give a little. In a recent speech at the Mortgage Bankers Association Conference in Las Vegas, Director Melvin L. Watt pledged some changes that might coax lenders to open their vaults and help more families become homeowners.

Promised changes include:

Reducing the minimumdown payment requirement to just 3%. This is below an already low 3.5% requirement for Federal Housing Administration (FHA)-insured mortgages.

Decreasing the chances of mortgage buy-backs, which occurs when a mortgage sold to the FHFA falls below FHFA standards and the bank is forced to repurchase the mortgage. The FHFA is promising to only go after banks that have a pattern of selling substandard mortgages, and not just one or two, which might just be innocent mistakes on behalf of the bank. Further, the FHFA will not automatically force the bank to buy back a mortgage that has had its private mortgage insurance (PMI) rescinded. Finally, they will not force a buy-back on the bank as long as the mortgage has had no more than two delinquencies within the first 36 days of acquisition.

Watt assures that details of the FHFA’s plans will be made available in the coming weeks. Frankly, Mr. Watt is in a conversation with the wrong audience, pitching them the old-time religion they want to hear.

This road looks familiar

On one hand, the proposed changes might encourage lenders to be a little more forgiving when it comes to qualifying a potential homebuyer. Lenders often cite the fear of mortgage buy-backs as a main deterrent to lending to anyone with less than stellar credit. To cover this buy-back risk, lenders properly charge a higher interest rate. Thus, a higher bar for buy-backs means more homebuyers can be qualified (and hopefully at lower interest rates) without the worry of the FHFA forcing mass buy-backs.

This brings us to the other hand. Relaxed standards and decreased down payment requirements are what got us into this mess of a housing recovery in the first place. Mortgage fundamentals are the same today as they have been for the past century, and each time they are abandoned we have a crisis.

Simply put, a 3% down payment is insufficient to guarantee the homebuyer has skin in the game. Home prices waver from year to year, meaning a new homeowner with an extremely low down payment is just as likely to be underwater as solvent in the year following origination. An underwater homeowner with very little invested in principal has very little reason to stay and pay. Then, when they walk away from their mortgage, the FHFA/GSE (taxpayers) are stuck with the bill. Alternatively, the FHA’s mortgage insurance premium (MIP) at 1.1% of principal for the life of the loan offsets taxpayers becoming the stuckee, a condition guaranteed with the FHFA down payment abandonment plan without the mortgage insurance or higher interest rates.

The alternative plan

So, how do you get lenders to loan more money — without pushing the housing market towards a cliff? The answer lies with:

clearer (not fewer) regulations on mortgage buy-back arrangements with the FHFA/GSEs; and

higher down payment requirements.

The FHFA is rightly concerned with helping lower-income households who have trouble saving up for a down payment. However, instead of addressing the problem by essentially subsidizing lenders while reducing their skin in the game based on retained investment requirements, the government needs to fix the problem at its source: stagnant incomes.

Here in California, jobs have nearly returned to pre-recession (2007) levels as of September 2014. Counting the working-age population increase of roughly 1.2 million between the start of the recession and today (seven years and counting), we’re unlikely to reach the actual jobs recovery until 2019 if all goes well with the global economy.

In the meantime, real incomes have slowed to a crawl (while GDP has grown handsomely to the benefit of others). From 2000 to 2013, real incomes in California grew by a per individual average of 4% – yes, 4% purchasing power increase in 14 years. Couple that with the over 200% price increase in homes over the same period of time. So viewed, it’s no wonder would-be homebuyers are having trouble qualifying when borrowing money is tied to income, not prices. Prices of homes must drop or personal income must rise before the population of end-user homeowners can rise.

Instead of the FHFA concentrating on efforts that benefit lenders (and home sellers at today’s prices), why not help homebuyers by setting up a tax-free savings program for individuals saving for a down payment?

It’s going on seven years since the outset of the recession. It’s about time we adjusted our strategy from a mortgage lender perspective of short-term band-aids to long-term thinking. That means investing in future homebuyers — not the systems that so far have prevented renters from becoming homeowners.

4 Comments

Benjamin
on November 3, 2014 at 2:38 pm

Just more lipstick for the pig…

Our Federal Government should not be in the business of lending money. It has in recent times become the largest creditor and debtor, simultaneously, in our world’s history. Not just with mortgage loans, but think about Student Loans as well. Who among us thinks this will end good? Or if there is even a way out at this point?

This article depicts an act of desperation from my view. But not desperation to house the less fortunate, rather; desperation to loan/print more money.

I haven’t sold a property where a loan was originated (other than hard-money) in the last 1.5 years, so I may be out of touch: but other than the hype of “homeownership,” I can’t imagine why anyone would put less than %20 down and pay PMI. Borrow from your 401K or friends/relatives. Or maybe save longer and work harder. Then there’s always the crazy notion of buy something you can actually afford. Or maybe, as was explained to my colleague in Sept. 2014 by the “Keep Your Home California Program,” you aren’t really a candidate for homeownership.

Look at all of the foreclosures that plagued our Nation from the 2007 crash onward and you will see they were overwhelmingly FNMA/FHLMC loans. Easy money has consequences for those (the Tax Payers) guaranteeing it’s repayment.

Easy money is not the answer to increased home loans. Reducing regulatory burdens, fees, taxes, and red tape is what is needed. Government intervention is what created the problem and more of it will only take us farther down the same road.

Borrowers don’t have enough skin in the game at a %3.5 down payment. I can’t tell you how many people I saw walk away from properties they could afford but simply didn’t want because they felt they were underwater on their LTV. If they had %20 in they would have weathered the storm and the continued meltdown in 2009 may have been avoided altogether.

PMI explains it all: at close of escrow they charge you upfront for an entire years worth of insurance incase you default within the first 12 months. Really? Why even originate the loan, if its risky? Again, the banks (our Federal Government) hedging against foreseeable loses.

And for some of these buyers they are merely leveraging their investments on the back of the American Tax Payer.

Easing the barriers to borrowing is not the answer. Easing regulatory burdens is.

Ask yourself: What is the purpose of Government? To get you a home loan?

Why is there no incentive to a Buyer willing to put 20% down when substantial
incentives are used to facilitate lender (Banks) who is originating and selling for
profit. The Mortgage Insurance (MI) should not be required when Buyer is 20%
down on Purchase when the property appraises?? This is common sense!
OC Realty & Associates

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